If you haven't heard, there's a housing bubble on. Speculators are driving up the price of housing, and when prices crash everyone will suffocate under the financial rubble. There are even blogs devoted to it.
So we're all doomed. Just thought I should let you know.
But wait! There's more...
Median home prices (the price of a home a reasonably prosperous family might buy) have historically closely tracked GDP per capita. That makes sense - as people make more, they spend more on housing.
So housing prices today are at historic highs relative to GDP per capita, right?
Well, not really. They're above the long run average, but about where they were in the late 70s and late 80s.
And with mortgage rates so low, they're quite affordable. In fact, the median home is as affordable as it has even been.
See, home prices are relatively insensitive to mortgage rates, which is why affordability and interest rates track each other so closely. But with rates at historic lows, people appear to be willing to spend a little more to buy a home now and lock in those rates.
But prices will drop, won't they?
Well, they've come down some already, and if mortgage rates rise precipitously, or the economy falls into recession, they might. Between April and September of 1990 prices dropped by 10%, and they didn't recover until the end of 1993. Would that be a disaster?
Now, there may be some markets that are frothy, and maybe high-end homes are going through the roof. But the median home, the one that median people like myself care most about, is well within reach, and looks like a pretty good investment right now - especially if you intend to stay for a while.
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